The Primary Business Cycle

1. The Primary Business Cycle Components and Measures

2. Components Supply of Money Demand for Money Price of Money Demand for Goods Supply of Goods Price of Goods Measures Coincident Indicators Leading Indicators Lagging Indicators C/L Ratio Components & Measures fromUS Bureau of Standards Survey of Current Business

3. Money • Supply of Money • M2 Money supply is good indicator. • Use indicator 106 of Survey of Current Business. (SCB 106) • Demand for Money • Use the consumer credit ratio. Defined as the ratio of consumer installment credit to personal income. • Use SCB 95.

4. Money • Price of Money (Interest Rates) • Federal Funds Rate. SCB 119 • 91-day T-bill Rate SCB 114 • Prime Rate SCB 109 • Corporate Bond Rate SCB 116 • Long-term T-bond Rate SCB 115 • Municipal Bond Rate SCB 117 • FHA Mortgage Rate SCB 118 • Velocity of Money SCB 108

5. Price of Money(Comments) The first seven indicators are used to give an indication of the state of interest rates. These do not all move at the same time, but in combination give a good indication of the state of this aspect of the economy. The eighth Indicator, Velocity of Money, defined as the ratio of personal Income to the money supply, M2 acts like a broad interest rate since it relates the demand for money to the supply of money. This is the same aspect of the economy measured by interest rates.

6. Goods • Supply There is no direct measure for this quantity. However capacity utilization is a goad indirect measure of supply of goods. Capacity Utilization (CU) is the ratio of capacity used in production to total available capacity. If CU is high then the supply of goods available to meet new demand is low. Conversely, if CU is low then the supply of goods to meet newdemand is high. These are listed as SCB 82 and SCB 84.

7. Goods • Demand • Measured by the real GNP which is actual GNP less effects of inflation • Price • Raw material prices SCB 23 • Producer Price Index SCB 336 • Consumer Price Index SCB 320

8. Measures • Coincident Indicators • Leading Indicators • Lagging Indicators • C/L Ratio

9. Measures • Coincident Indicators SCB 920These are based on sales, production, employment and personal income. It is a good indicator of the demand for goods and thus tends to be coincident with the business cycle. They are coincident with economic peaks and valleys. • Leading Indicators SCB 910These are based on orders, rate of change of the coincident indicators and the S&P 500 Index. They have peaks and valleys ahead of the coincident indicators

10. Measures • Lagging IndicatorsSCB 930 • These are not too useful by themselves because they are lagging. However they are useful when used in conjunction with the coincident indicators by computing the C/L ratio.These have peaks and valleys later than the coincident indicators. • C//L Ratio SCB 940 • Give correct indication of market bottoms but a false precursor to market tops

11. Primary Trend Analysis Characteristics and Guidelines Stock Market Profile (SMP)

12. Characteristics • Knowing the direction of the primary trend is the most important information an investor can have. • The Stock Market Profile (SMP) is a proven guide to the basic market forces producing the trends. • SMP is essential for all investing and trading; short, intermediate and long-term.

13. Guidelines for the Analysis • The time needed to keep the analysis up to date must be nominal. • Interpretation of the indicators must be straightforward • Indicator data must be readily available • No copyrighted or secretly constructed indicators may be used • Each indicator must have a logical (physical) rationale • Each indicator must have proven itself through many market cycles • Remember, indicators may not always be useful because they are one-sided

14. SMP • Three Groups of Indicators • Market Performance • Investor Sentiment • Money and Credit

15. Market Performance • Advance-Decline Line (ADL) bear • New High Index (NHI) bear • Volume (VOL) bear • Moving Average of the DJI (MA) both • Dow Jones Utilities (DJU) bull(the indicators are reliable predictors for bull or bear markets, or both, as indicated)

16. Advance DeclineLine • Definition • A running total of the difference between the number of stocks advancing and the number of stocks declining. • Rationale • Markets tend to run in waves and, in a bull market, when the DJI and the ADL are in gear, each makes its new highs at approximately the same time and the corrective dips are of about the same magnitude. At some point, however, a new high in the average may not be confirmed by a new high in the ADL. When this happens and the DJI continues up when the ADL retreats, a disparity exists and in this case the DJI is out­performing the majority of stocks. This is a signal for an end to the bull market.

17. Advance DeclineLine • Rules for Primary Trend Analysis • In bull markets score -1 when the ADL has diverged from the DJI for six months. • Cancel the -1 score if the ADL rises to a new high. In bear markets ignore the ADL.

18. New High Index • Definition • A weekly total of the number of stocks reaching a new high for the year.. • Rationale • Historically it has been shown that the NIH peaks at about half-way through a bull market (50% rule) and then gradually declines in a downward zig-zag pattern. Thus it tends to be an early warning indicator of an end to a bull market.

19. New High Index • Rules for Primary Trend Analysis • In bull markets score -1 when, after a peak in the NHI, either of the following conditions are satisfied:a. Twelve months have elapsed without another new peak or, b. An amount of tome has elapsed equal to the time between the bear market low and the NHI peak (thee 50% rule). • When there is a question as to whether a valid peak in the NHI actually occurred (e.g. at switch-over time in March each year), check the New Low Index. At times like this the differ­ence between the HNHI nd the NLI governs. • Be on the lookout for short weeks, in which the NHI is automatically understated.

20. Volume index • Definition • A monthly average of daily volume. • Rationale • In virtually every past bull market, average daily volume has increased along with price until at some point, well along in the cycle, price has continued up but volume has gradually decreased until, finally, the bull market peak was reached and prices collapsed.

21. Volume index • Rules for Primary Trend Analysis • In bull markets score -1 when the VI fails to make a new high for four consecutive months. • ignore any high volume month in which the DJI declines. •  Cancel the -1 score if volume again rises to a new high, provided that the DJI posts a new gain for that month. • In bear markets ignore the VI.

22. Moving Average • Definition • A thirty week moving average of the DJI.. • Rationale • As long as the bull market is in progress, the Dii remains above the MA. Intermediate swings may cause it to dip below, but usually this effect in only temporary. By its very definition, the MA has a lag so it is necessary to wait for a confirmation before scoring this indicator.

23. Moving Average • Rules for Primary Trend Analysis • In bull markets score -1 when the DJI has dropped below the MA for two consecutive weeks. • Score and additional -1 when the MA itself turns down. • Cancel either or both negative scores when the DJI again rises above the MA and/or the MA once again turns up. • In bear markets score the MA exactly the same, except in reverse.

24. Dow Jones Utility Average • Definition • An arithmetic average of the prices of fifteen public utility stocks. • Rationale • The DJI tends to lead into bull markets because professional money managers tend to emphasize the purchase of defensive issues until the market climate is clearly established. Thus the strongest buying at the bottom of bear markets nearly always is in the utility and other conservative areas.

25. Dow Jones Utility Average • Rules for Primary Trend Analysis • In bear markets score +1 when the DJI fails for three consecutive weeks to confirm a new low in the DJI. • Cancel the +1 score if the DJI subsequently retreats to a new low. • In bull markets ignore the DJI.

26. Investor Sentiment • Odd Lot Sales/Purchase Ratio (QLSPR) both • Odd Lot Short Sales Ratio (OLSSR) bull • Odd Lot Trading Ratio (OLTR) both • Free Credit Balance (FCB) both • Debit Balance (DB) both

27. Odd lot Sales/Purchase Ratio • Definition • A ratio (expressed as a percentage) of storks sold to stocks bought, in odd lots. • Rationale • Historically , the odd Iotter buys more heavily on dips and sell on rallies. It is almost a conditioned reflex since everyone wants to buy at bargain basement prices and cash in when profits have been realized. This is sound as long as the pri­mary trend of the market is intact. However, because the odd­lotter exercises this tendency Indiscriminately, he is nearly always wrong at the market turning points.

28. Odd lot Sales/Purchase Ratio • Rules for Primary Trend Analysis • In bull markets score -1 when the OLSSPR has traced a downward zig-zag that satisfies the following conditions:a. The complete zig-zag has encompassed at least ten weeks in time and 10.0 in scope.b. Each leg of the zig-zag has exceeded two weeks in time and 3.0 in scope.c. The final leg has dropped below its previous low point by at least 2.0. • Cancel the -1 score if the following conditions are satisfied:a. The OLSPR retraces the pattern described in “1” above, except in the opposite direction.b. The OLSPR resides generally in the area above 90.

29. Odd lot Sales/Purchase Ratio • Rules for Primary Trend Analysis (concl) • In bear markets score +1 when the OLSPR traces and upward zig-zag that satisfies the conditions set forth in “1” above. • Cancel the +1 score if the conditions opposite to those set forth in “2” above are satisfied.

30. Odd lot trading ratio • Definition • A ratio of the odd lot volume to the total volume for a given week. • Rationale • If this ratio falls it indicates a public apathy in the market and in bear markets this condition has often foretold a major bottom in the averages. In a bull market the same is true in reverse. When the ratio is high, public enthusiasm is getting out of hand and a top is imminent.

31. Odd lot trading ratio • Rules for Primary Trend Analysis • In bull markets score -1 when the OLTR has traced a downward zig-zag that satisfies the following conditions:a. The complete zig-zag has encompassed at least twelve weeks in tome and 2.0 in scope.b. Each leg of the zig-zag has exceeded two weeks in time and 0.5 in scope.c. The final leg has dropped below its previous low point by at least 0.5. • Cancel the -1 score if the following conditions are satisfies:a. The OLTR retraces the pattern described in “1” above, except in the opposite direction.b. The OLTR resides generally in the area above 10.

32. Odd lot trading ratio (concl) • Rules for Primary Trend Analysis • In bear markets score +1 when the OLTR traces an upward zig­zag that satisfies the conditions set forth in “1” above. • Cancel the +1 score if the conditions opposite to those set forth In “2” above are satisfied.Odd lot short sales ratio.

33. Odd lot short sales ratio • Definition • A percentage of shorts to total odd lot sales, including shorts. • Rationale • Short sellers tend to be trend followers. They sell more and more as a bear trend progresses and become less and less active in bull markets. This is the correct procedure, but most of the time the are late in getting started and follow the trend until long after it has turned against them. Thus at the peak of a bull market, when short selling should be the most profit­able, this ratio drops to negligible levels. The reverse is true in bear markets. No wonder it is said that odd lot short sellers are born losers.

34. Odd lot short sales ratio • Rules for Primary Trend Analysis • In bear markets score +1 when the OLSSR rises above 2.0. Cancel the +1 score if the following conditions are satisfied:a. The OLSSR retreats below 2.0 and remains there for two months.b. The total SMP score is less than +5 (including the OLSSR). • In bull markets ignore the OLSSR. 

35. Free Credit Balance • Definition • Credit balances on books of member firms. • Rationale • When credit balances are rising, buying power is increasing and the implications for the market is bullish. When falling, the presumption is that the public is using up its buying power and sooner or later this particular market support will disappear.

36. Free Credit Balance • Rules for Primary Trend Analysis • In bull markets score -1 when the FCB fails to make a new high for four consecutive months. • In bear markets score a +1 when the FCB fails to make a new low for four consecutive months. • Cancel either signal when the FCB subsequently rises to a new high in bull markets or retreats to a new low in bear markets.

37. Debit Balance • Definition • Margin accounts on books of member firms. • Rationale • The margin customer is usually a more savvy investor than the odd Iotters and the cash customers. When a top is approaching he usually smells trouble and begins distributing his stock. The reverse It true at market bottoms.

38. Debit Balance • Rules for Primary Trend Analysis • In bull markets score -1 when the DB fails to make a new high for four consecutive months. • In bear markets score +1 when the D8 fails to make a new low for four consecutive months. • Cancel either signal when the DB subsequently rises to a new high in bull markets or retreats to a new low in bear markets.

39. Discount Rate • Definition • The discount rate is the interest rate that a member bank in the Federal Reserve System must pay to borrow funds from its district Federal Reserve Bank.

40. Money and Credit • Discount Rate (DR)both • Member Bank Reserves (MBR)both • Margin Requirement (MR)both

41. Discount Rate • Rules for Primary Trend Analysis • In bull markets ignore the first upward change in the DR, but score -1 for each subsequent upward change, until the total of all money and credit indicators is -3. • In bear markets ignore the first downward change in the DR, but score +1 for each subsequent downward change, until the total of all money and credit indicators is +3. •  Cancel any DR score if and when the change that created it is rescinded.

42. Member Bank Reserves • Definition • Federal Reserve member banks are required to maintain on deposit at their district banks or as cash in their own vaults a sum of money that bears a predetermined relationship with their demand or checking account deposits.

43. Member Bank Reserves • Rules for Primary Trend Analysis • In bull markets ignore the first upward change an MBR, but score -1 for each subsequent upward change, until the total of all money and credit indictors is -3. • In bear markets ignore the first downward change in the MBR, but score +1 for each subsequent downward change, until the total of all money and credit indicators Is +3. • Cancel any MBR score if and when the change that created it is rescinded.

44. Margin Requirement • Definition • Margin is the percentage amount that can be borrowed to finance the purchase of a security.

45. Margin Requirement • Rules for Primary Trend Analysis • In bull markets score -1 for each subsequent upward change, until the total of all money and credit indictors is -3. • In bear markets score +1 for each subsequent downward change, until the total of all money and credit indicators is +3. • Cancel any MR score if and when the change that created it is rescinded.